Is copying Redbox’s strategy a way for Blockbuster to survive? I’m beginning to think so.

Earlier this week, I rented from a Redbox for the first time. I have walked by these kiosks in our area for well over a year now, and in recent months they’ve become quite numerous — Redbox lists 19 of them within 10 miles of my house alone. The allure of a movie for just a buck a night is just too good of a deal to pass up.

While entering my selections into the kiosk — Star Trek and Angels & Demons — I couldn’t help but wonder why Blockbuster wasn’t doing the same thing. Heck, it costs you $5 to rent these same movies at their stores no matter whether you return them the next day or however long your local store allows the movies to be out.

It’s for this reason why Blockbuster is struggling. In this new world, it no longer is worthwhile to have a storefront because of the overhead costs. Think about it. Netflix has considerably less infrastructure costs because all its business is online and only needs shipping warehouses to serve its customers; Redbox has even less overhead since it essentially freeloads off the locations where its kiosks sit.

There’s just no way that the company can be on a level playing field with its competitors because of this. Tuesday’s news of the company partnering with NCR to place 200 “Blockbuster Express” kiosks in Duane Reade Drugstores across New York City could arguably be Blockbuster’s path to salvation.

When the company is done, about 2,500 kiosks will be up and running around the country. Each will hold about 900 DVDs, which will give the movie retailer an opportunity to offer a wider selection than that of Redbox, which can only hold about 500 discs.

As the company moves to this system, it will allow Blockbuster to continue closing down its retail locations, which have become its Achilles heel. This will stink for those employees that could soon find themselves out of a job, but its just a reality of our modern digital economy.

It’s going to be very interesting to see how Redbox responds. Blockbuster eliminated its competition by simply being able to offer a broader selection of movies than its smaller competitors, and now the company that arguably pioneered the movie rental kiosk finds itself in the same situation.

One thing it has so far as an advantage over Blockbuster is scale — some 17,500 kiosks are located in McDonald’s, Wal Marts, Walgreens, and other grocery and drug stores around the country. Blockbuster will need to quickly ramp up to legitimately compete.

7 Comments For This Post

This seems like a stupid intermediate step in a world where people are increasingly dumping physical media. And if you’re not going to go browse around the aisles looking at movies, why not just stay home and get it online through one of the many services?

Everyone else is jumping into 2010+ and Blockbuster is making huge strides in catching up to 2005.

While DVD kiosks will be profitable, it won’t be the savior that Blockbuster claims that it will be. For example, the 2,500 kiosks that they’ve already deployed weren’t actually deployed by Blockbuster, they were purchased as part of an acquisition when NCR bought out TNR Entertainment. The remaining kiosks that are expected to be deployed are being paid for by NCR. This is significant because NCR uses DVD distribution companies other than Blockbuster for their films. That’s right the movies in the Blockbuster kiosk don’t even come from Blockbuster. The whisper number on the street is that Blockbuster gets to keep 10% of every transaction as a licensing fee and while that will be incredibly profitable revenue, it would also mean that Blockbuster is only earning 10 cents a night for the rental. Even assuming that they can match Redbox’s phenomenal growth, you’re looking at less than $100 million a year when their market matures. When you consider that Blockbuster did $2.8 billion in sales for all of 2008, it helps to put the significance of this number in perspective.

I used Redbox for a few months, until they billed me five times for the same DVD, and I had to call to get them to remove the overbillings. After that, I canceled because I didn’t want to take the chance it’d happen again, especially when the rep had no explanation for the overbillings and why they had not caught the mistake. Great idea, poorly executed.

I had Blockbuster’s Netflix-type online rental service up until a month ago when I switched to Netflix. Blockbuster’s services not only failed to offer online streaming – but was also more expensive and slower. The average wait to receive a new movie after shipping it back was 4-5 days; Netflix gets it to me in 2-3. I also realized that I wasn’t using Blockbuster’s in-store movie trade as much as I did when I subscribed 2 years ago; this was my biggest reason for going with Blockbuster.

In response to Davis Freeberg…while $100 million doesn’t seem like a big number in relation to their $5B in revenue, keep in mind that Blockbuster has no costs associated with the kiosks. Therefore, that $100 million drops right to the bottom line. At 190 million shares outstanding, that works out to .53 per share. At a modest PE ratio of 20, that comes out to $10.60 per share, just on the kiosk channel! Something for shareholders and management to get excited about, given that they are currently trading at 63 cents. So, in fact, it actually could be the savior that Blockbuster thinks it could be. Thank you for pointing out the opportunity.